Time to close loophole on natural gas

Updated 5:29 pm, Friday, February 10, 2012

Dust permeates the air at a Chesapeake Energy Co. fracking operation over the Eagle Ford shale formation.

Dust permeates the air at a Chesapeake Energy Co. fracking operation over the Eagle Ford shale formation.

Photo: San Antonio Express-News

Time to close loophole on natural gas

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Technological advances have opened up vast new sources of oil and natural gas in Texas. Hydraulic fracturing in the Barnett and Eagle Ford shale formations has created an energy boom that is the target of huge investments and is the source of huge profits.

The ease with which fracking makes it possible to extract these resources also renders obsolete a state tax exemption for high-cost natural gas production. The Legislature enacted the exemption in 1989 as a temporary measure to spur investment in what were then technically difficult wells to drill.

Lawmakers extended the exemption in 1995 and 1999. It was set to expire on 2003.

In a legislative mystery worthy of Sherlock Holmes, however, the exemption was made permanent when some unknown person stealthily inserted a single line into a complex tax bill. Even the authors of the measure claim not to know how the permanent tax break was inserted. No one else in Austin has an answer for how the Legislature approved it with no one noticing.

Natural gas production is normally taxed at 7.5 percent of market value. But the Legislative Budget Board says the effective tax rate is actually 1.1 to 1.9 percent because of this and other exemptions.

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The high-cost exemption alone led to the loss of $7.4 billion in revenue from 2004 to 2009. New numbers from the state comptroller's office show the exemption reduced state revenue by $1.3 billion in 2010 and $1 billion in 2011.

The LBB found that in 2009, 55 percent of gas production in Texas qualified for the high-cost exemption. But the production definition is so loose and so antiquated that a $24,000 gas well qualified as a high-cost operation even though the median cost for drilling a well was $2.3 million.

Rep. Mike Villarreal, D-San Antonio, introduced a measure during the last session that would have suspended the exemption during years in which funding for public education declined or the natural gas market was strong. While lawmakers cut spending on public education by $4 billion from the existing funding formula, they rejected Villarreal's measure that would have closed a multi-billion-dollar loophole.

The Legislature should reconsider the high-cost exemption when it resumes next January. At the very least, lawmakers should write tighter standards for so-called difficult wells that take into account two decades worth of drilling innovations.